In an interview to CNBC-TV18, Sajjid Chinoy, Asia economics, JPMorgan says it will be very tricky for the central bank to go ahead with any rate cuts for FY13 and doesnt see the RBI having any headroom to cut further.
In an interview to CNBC-TV18, Sajjid Chinoy, Asia economics, JPMorgan and Rahul Bajoria, Regional Economist, Barclays Capital say they have lowered their GDP forecast for India for FY12. They foresee the annual growth forecast to be about 6.7% or 6.8% for FY12.
For now, Chinoy says it will be very tricky for the central bank to go ahead with any rate cuts for FY13 and doesnt see the RBI having any headroom to cut further.
Bajoria says if core inflation remains below 5%, the RBI will have headroom to cut interest rates. "Our sense is that the number is probably going to remain sticky around 4.5-5%. But if the RBI thinks more rate cuts are warranted they will have the headroom to cut it."
He is expecting about 50-75 basis points by the end of the current fiscal.
Below is an edited transcript of their interview on CNBC-TV18. Watch the accompanying videos for more.
Q: March is traditionally a very strong month. So seasonally adjusted this should actually be worse than the 3.5% contraction?
Bajoria: I think so. Seasonally adjusted the number is likely to show a reversal in the slight momentum pick-up that we have been seeing in the last couple of months, but capital goods is probably one of the most volatile components within the IIP. The thing is the core industries are starting to show some signs of improvement. I would take the number with a pinch of salt in a way. Our sense would be that the underlying recovery is still quite weak and it will not give the RBI or the government a lot of comfort.
Q: Seasonally adjusted, is it going to be worse than 3.5% because logically we should get a better performance in March, people are normally out to fill up their targets. We normally see a sharp spike in industrial output even in the bad years in the month of March. Secondly, where does this leave the RBI?
Chinoy: We cannot use previous seasonal adjustments this year for a very specific reason. Typically, the Budget is in the last day of February and you have tax planning issues sorted out and March becomes then when you fulfill your end targets. This year there was a bit of a distortion. The Budget got pushed back to the middle of March and our sense is a lot of production especially in consumer durables got pre-poned to January and February, in anticipation correctly of the excise duty hikes that were going to happen in the Budget. So in a way the seasonal adjustment doesn’t work.
My sense is there are two main drivers. Consumer durable production was strong in January and February on a sequential basis and you have seen some payback in the month of March precisely for this Budget effect. If you just think about capital goods, in the last two months you actually had very strong sequential increases in capital goods, January and February. This is the first time that has happened since September of 2010.
So given how volatile this series is some payback was inevitable. So if you look at that payback of capital goods and the pre-poning of production in January and February, in a way you can begin to understand why this number is so weak. No excuses, there are some technical issues here, the bottomline is that the recovery is still weak and there is really no conviction in activity.
Q: Because of the Budget coming in later, we actually saw heightened car sales in March with people probably buying diesel cars ahead of an expectation that maybe things will get worse in April. Does that not have an impact on production also? On the contrary, production should have good isn’t it?
Chinoy: The production typically happens before that. So January and February the sense was when production increased in anticipation of sales in February and March.
Q: 2.8% industrial growth for the full year. Where does this first leave your Q4 GDP forecast and your full year FY12 GDP forecast?
Chinoy: Clearly, the forecast will have to be lowered quite significantly. Our fourth quarter fiscal year forecast for GDP growth is going to be around 6.4-6.5% which then takes an annual growth forecast to about 6.7% or 6.8% which by the way is exactly what we grew at during the Lehman crisis here. We have touched those lows again despite there not being a global financial crisis which is quite sobering.
Q: With regards to FY13 then considering that the RBI will take cognisance of these IIP figures that we are working with; do you foresee a 7% in FY13?
Chinoy: It will come down very much to the basis of policy actions taken by the government. I think unfortunately RBI is not going to have much room to cut from here. When you have a current account deficit which is 4% of GDP and your rupee is at an all time low, it will be a very brave central bank to cut rates at this point. The bias for monetary policy has to be towards tightening, not loosening when you have got two large twin deficits.
To jump start the growth momentum we will have to see some movement both on public investment, infrastructure and private investment. Unfortunately, those decisions will be affected much more by what happens in Delhi and the policy actions there, than they will be by the actions of the RBI in Mumbai.
Q: What happens to your GDP forecast, both Q4 as well as full year FY12?
Bajoria: As far as the Q4 number is concerned we will probably improve slightly from the Q3 number of 6.1%, but it’s going to be a 20 at the most 30 bps uptake. The whole year forecast as Sajjid said, would be somewhere around 6.7-6.8%.
At the end of the day, we are still looking at a slightly better GDP number for the current fiscal year, simply because some of the existing drag in some of the infrastructure sectors like mining and electricity are probably going to go away and if the monsoons are good, the agricultural productivity should also improve at the margin.
Q: Weren’t we working with 1% average for the industrial output for the October-December quarter?
Q: When we look at the Q4 numbers which also coincide with the January-March quarter, it is not a contraction that comes to the mind. 0.8% is the average manufacturing growth that we are getting for January-March. Surely these numbers are not reflecting of the economy? The corporate picture while it is not very good, did not give such a dismal picture?
Chinoy: Absolutely. We shouldn’t get carried away with one IIP number as these are notoriously volatile. If you look at the other high frequency indicators things don’t look as bad. The PMIs have retraced a bit but the forward looking components are strong. Exports sequentially over the last three-four months have picked up. So the IIP in a way overstates the weakness in some months and overstates the strength in the other months.
My sense is activity bottomed in Q4 of last calendar year but we have been buffeted by new uncertainty in the last few weeks which is the exchange rate. That is really a wild card. If the currency remains very weak, that is going to pay heavily on sentiment and then that could further push back any pick-up in activity going forward.
Q: Where does this leave the FY13 GDP? Do you think you are going to start a series of forecast which will bring it even below 7%? Most of the forecasts range between 7-7.6% which is the outlandish government expectation, RBI at 7.3% and most of the other expectations are between 7-7.3%. Are we going to start to see forecast that will be sub-7%?
Bajoria: No, I think it’s a bit too premature, because we haven’t really received any significant amount of information about the current fiscal year. This is the number for March in a way. We will most probably retain our 7.1% number for the next fiscal year. Once the monsoon starts and we get a better picture of what’s happening in the agriculture sector which would be reflective of the rural demand, we will probably have a much stronger sense of where the GDP numbers are going to go.
Q: Sajid is clear that the RBI doesn’t have headroom to cut further. What is your view?
Bajoria: We still think that if the inflation numbers remain manageable, especially if core inflation remains below 5%, the RBI will have headroom to cut interest rates because that is really the indicator that they are following right now. Our sense is that the number is probably going to remain sticky around 4.5-5%. But if the RBI thinks that more rate cuts are warranted they will have the headroom to cut it. We are expecting about 50-75 basis points by the end of the current fiscal.
Q: So even June 18 might yield something?
Bajoria: It is unlikely as it will depend on inflation prints but I won’t completely rule out a rate cut in the next two meetings
Q: What is the inflation number you are going with if you have already calculated it?
Bajoria: It should be around 6.7%.
Q: What will you go with for inflation?
Chinoy: Almost at 7%. The impact of a weak rupee will have a much bigger impact than many are sort of forecasting.